10. Business strategy

Every company or firm develops its strategy, i.e., its overall method of achieving its objectives. The strategy must be very flexible, because only a flexible strategy permits taking into account market conditions, which are constantly changing.

Strategy depends on long-term and short-term objectives and prospects. The long-term objective is always profits. But a company may be ready to cut its profits for some time to have a greater share of the market to sell its products. Greater market share means greater profits in the future. So, a company may put gaining market share as its short-term objective. To achieve this, the company has to reduce its prices. But then, the margins will be lower. Margins are the differences between what it costs to manufacture a product and the price at which it is sold. Lowering the margins means cutting the profits.

I n this case, in order to increase profits over the long term, the company needs to increase production. Gaining market share allows it to increase production, and that increase cuts of the unit cost (i.e., the cost to manufacture one unit of what the company produces).

On the other hand, increasing production may cut profits as well, because the increased production requires new investments into machinery and technology.

The strategy, then, has to be oriented in two directions – the market and the manufacturing process. If we focus on the market, then the strategy is to gain market share. If we focus on manufacture as a source of profitability, then the quality of products should be improved. In that case, prices may be raised as well, in their turn raising the profits.

But this strategy does not work well if the market is competitive. Price increases, whatever the quality, may result in a drop in sales. A firm that does not increase prices, or the one that even reduces them, adapts to the market more easily.

To reduce costs without increasing (or even reducing) prices, companies often have to sub-contract some of their production. That means job losses in the company itself, though the remaining jobs become more stable and secure.

It may be said that developing a sound and flexible strategy is very difficult, because every strategy has its advantages and disadvantages. Many factors have to be taken into account.

Questions for comprehension check-up and discussion:

1. What is a business strategy?

2. What are the objectives that every strategy depends on?

3. Name two directions a stategy can be oriented in.

4. Why do companies have sometimes to sub-contract their production?

5. What factors, in your opinion, have to be taken into account in order to develop a sound strategy?